SUSTAINABILITY ISSUES

Transcription

1 SUSTAINABILITY ISSUES Planning, Repurchase Liability, Valuation and Retirement Readiness Northwest Chapter Anchorage Let s Talk ESOPs September 28, 2017 Janeece Higgins CEO Alaska Rubber Group Kim Blaugher VP Consulting Today s Program ESOP company sustainability Methods for addressing sustainability What is required for retirement and what should benefit level be? Communicating changes to associates 1 1

2 Sustainability of ESOP Structure What is the desired long term ownership structure? Is intent to maintain, increase or decrease shares owned by ESOP? Repurchase liability competes with cash required for capital expenditures and future growth The level of benefit affects share price Repurchase strategy affects share price 2 How Much Equity Value Do You Have? Equity value as a multiple of eligible compensation Which is most desirable? Why is this important? Company Average Comp # of Employees Eligible for ESOP Eligible Compensation Equity Value Value to Compensation Manufacturing $50, $35,000,000 $300,000, x Construction $76, $25,000,000 $100,000, x Engineering $122, ,500 $550,000,000 $1,000,000, x 11 2

3 Determining How to Handle Repurchase Liability Board determines how to fund repurchase liability; available options include: Company redeems ESOP shares Recycle using current company funding Releverage by company redeeming shares, then ESOP trustee purchasing shares with internal ESOP loan Method of funding repurchase liability will impact: Share value Long term versus new associates Non ESOP shareholders 5 Aggregate vs. Per Share Value Illustration Assume company has equity value of $10 million today, or $10.00 per share, and needs to repurchase 100,000 shares from ESOP participants for $1 million Hypothetical Impact of Redeeming Before Redemption After Aggregate Equity Value $ 10,000,000 ($ 1,000,000) $ 9,000,000 Number of Shares Outstanding 1,000,000 (100,000) 900,000 Value per Share $ $ $ Hypothetical Impact of Recycling Before Repurchase After Aggregate Equity Value $ 10,000,000 ($ 1,000,000) $ 9,000,000 Number of Shares Outstanding 1,000,000 (100,000) 1,000,000 Value per Share $ $ $

4 Board of Director s Responsibility to Shareholders Decisions made by the BOD or management will affect ESOP participants differently Consider a decision to fund the repurchase liability with employer contribution vs. redeeming the shares An employer contribution will benefit associates receiving allocations in the current year, thus benefitting the newer employees Redemption of stock reduces the number of shares outstanding resulting in a higher per share value which will benefit participants with the greatest number of shares, such as the longer term ESOP participants If the BOD has fiduciary obligation for classes of ESOP participants, how can it make decisions in the best interest of the company when every decision will have winners and losers? 13 Who Holds the ESOP shares? Common demographics for participants with greater than 5 years of service and participants with 5 years of service or less 19 4

5 How Should Equity Value be Allocated? Consider the following equity value allocation and watch what happens when changes are made Terms 12% Outside Shareholders 0% Suspense Shares 0% Actives 5 YOS or Less 31% Actives >5 YOS 57% 14 Comparison Redeem vs. Recycle and Redeem vs. Releverage Redeem Recycle Releverage Shares outstanding Reduced No impact No impact(*) ESOP Ownership Reduced if < 100% No impact No impact Additional shares to Employee ESOP accounts No Yes Yes, overtime Per share value Anti dilution Diluted Diluted Employer contribution Employee group benefited most Corporation s cash flow Income tax No EEs with larger share balances Reduce No deduction Yes and dividends/distribution Depends upon funding contribution (ALL) dividends (OLD) Not Reduced if =Benefit Expense Deduction for employer contribution Yes and dividends/distribution Comp to Comp (ALL) Not reduced if =Benefit Expense Deduction for contribution/dividends * Assumes that after redemption by company, all shares are sold to ESOP Is a new securities acquisition loan which needs an adequate consideration opinion at time of transaction 6 5

6 Methods are Available to Target Equity Value to Associates Methods for funding repurchase liability and targeting allocations to different classes of associates to meet the company s goals and objectives include: Redeem vs. recycle Employer contributions Dividends Releveraging Combination of the above 10 Issues in Releveraging ESOP Loans Share value decline due to more shares outstanding Reduce future ESOP balances of participants with large balances Participants with large balances are impacted most by share value changes versus current year allocations. ESOP trustee due diligence What percent of shares should be in suspense? 5 6

7 Extending ESOP Loan Term Reasons to consider extending the ESOP loan include: Reduce future repurchase liability Increase future Company equity value and balance sheet cash Reduce excess ESOP balances which make employees much wealthier in retirement than during their working life. Establish a Company policy for the desired level of ESOP allocation as a percentage of wages such as 15% of wages. 5 Releveraging ESOP Loans Reasons to consider releveraging ESOP loans include: Reduce future repurchase liability Increase future Company equity value and balance sheet cash Reduce excess ESOP balances which make employees much wealthier in retirement than during their working life. 5 7

8 Releveraging to Increase Shares in Suspense ESOP Trustee Authorized but unissued shares sold to ESOP ESOP loan Company 14 Releveraging to Fund Distributions Step 2 Releverage loan ESOP Trust Stock sold to ESOP for ESOP loan Stock redeemed Step 1 Fund distributions Stock power with put to Company Company ESOP Participants entitled to distributions Cash paid to participants for stock 15 8

9 Impact of Social Security in Retirement* What will your social security benefit be as a percent of needed earnings in retirement? 80% 70% Percentage of salary replaced by social security 60% 50% 40% 30% 20% 10% 0% $25,000 $50,000 $75,000 $100,000 $150,000 $200,000 ANNUAL SALARY Benefits at age 62 Benefits at age 66 Benefits at age 70 * Based upon data from benefit calculator on website. For illustration purposes; does not reflect the past or future returns of any Principal product. 16 Are Associates Reaching Retirement Income Adequacy? 17 9

10 Savings to Employment Income Ratio Target* Retirement savings required by age to realize retirement security 25.0x 21.6x Retirement Savings/Salary 20.0x 15.0x 10.0x 5.0x 0.0x 15.8x 11.4x 7.7x 6.3x 10.6x 4.3x 8.2x 3.0x 6.2x 1.2x 0.0x 4.5x 0.3x 1.1x 2.0x 3.2x AGE Needed Retirement Savings/Salary Associate's ESOP Account/Salary * These targets represent a factor that when applied to a current employment income, given the amount of total savings needed at the current age to maintain a 13% savings rate and reach an adequate savings level by the end of age 64. For illustration purposes; does not reflect the past or future returns of any Principal product. 18 Questions? Janeece Higgins, CEO Alaska Rubber Group Office: jhiggins@alaskarubber.com Kim Blaugher, VP Consulting, Principal Financial Group Office: Cell: blaugher.kim@principal.com 10